COVID related distributions immediate repayment

Submitted by Jim O'Grady on Sat, 2020-11-28 17:14

I have an existing 72t plan. I turn 59 1/2 in March 2022 and the end date of the 72t plan is December 2022. I’m eligible for a COVID Related Distribution. With a Covid Related Distribution, you can replay the distribution to any IRA/401K. plan. I haven’t seen a requirement that you the IRA you repay to becomes part of the 72t plan. Therefore, making such a distribution from the IRA in the 72t plan and repaying it to a new IRA before the end of 2020 seems like a good move. You’d now have flexibility with up to 100,000 that you did not have when it was part of the 72t. In my case, you could make extra distributions after March of 2020, but in any case, you’d have money that you could manage free of any 72t restrictions as long as you can make remaining 72t distributions with what remains 72t IRA. Are there pitfalls here, except the need to get the distribution and repay in the dwindling days of 2020?



Submitted by Alan - IRA critic on Sat, 2020-11-28 18:10

  • Notice 2020-50, Sec 4 (H) states that a 72t plan is not affected as a result of a CRD, however the Notice is silent with respect to repayments of the CRD. While that leaves some uncertainty, it actually appears that repayment to another plan outside the 72t plan is safer since that could not be treated as a contribution to the plan.
  • Therefore, it appears that your plan will work and your CRD must be completed by 12/30/2020. As a CRD you would then have 3 years to repay if you needed the time, but you could also repay immediately with your goal being reallocation of funds to an unrestricted IRA account. Such rollover would be exempt from the one rollover rule under the CARES Act definition of a CRD. While your 72t plan balance would be reduced by 100k, that would not affect your plan. Even if your plan ran dry later on, this would not create a busted plan. However, if you elect the one time switch to the RMD method, the CRD would result in a reduced plan balance that would also reduce your RMD method distribution for the balance of the plan term.
  • NOTE: The general consensus is that you cannot convert a CRD to a Roth IRA because that would not be a non taxable transfer. Therefore, I would avoid that type of repayment.
  • You will of course have to report the CRD and repayment on Form 8915 E  (not yet released by the IRS). That should be sufficiently clear to the IRS why your 72t distribution is 100k higher than expected.

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